Almanac

Schools - February 6, 2013

Court denies schools' appeal to recover losses in Lehman collapse

by Renee Batti

A state appeals court on Jan. 31 approved the dismissal of a lawsuit brought against San Mateo County by 12 county school districts — including the Menlo Park City, Las Lomitas, Portola Valley and Woodside districts — over the collective loss of about $20 million in investments resulting from the 2008 Lehman Brothers collapse.

The districts sued the county and its treasurer at the time, Lee Buffington, in January 2011, claiming that the county failed to act "with care, skill, prudence and diligence" in managing the county investment pool that school districts are required, for a substantial fee, to put their bond revenue and other working funds in.

Other public agencies in the county, and the county itself, had funds in the investment pool, which lost a total of about $155 million with the Lehman Brothers bankruptcy.

The First District Court of Appeals ruled that the county's investment decisions are "discretionary activity which should not be the subject of scrutiny and second-guessing," according to a press release from the county.

Of the local school districts that joined the legal action, the Menlo Park City School District took the biggest hit by far: It lost nearly $4 million. The Ravenswood School District lost about $854,500; the Las Lomitas district, almost $400,000; the Portola Valley district, nearly $150,000; and the Woodside district, about $100,000.

The Sequoia Union High School District, which didn't participate in the lawsuit, lost about $6.5 million.

The school districts' actions were led by the county Office of Education, headed by Superintendent Anne Campbell.

The lawsuit asserted that the treasurer's office violated state and county investment policies; failed to adhere to legally required prudent investment practices; failed to properly diversify the $155 million in investments "among sectors of the economy"; and failed to sell the Lehman notes "after learning of deterioration in the finances, credit rating, and stock price of Lehman."

Stuart Gasner of Keker & Van Nest, the San Francisco law firm representing the county, said the court's ruling centered on its main finding that the defendants were immune from the civil action.

In the county-issued press release, Mr. Gasner said, "We are pleased with the decision and that a three-judge panel essentially came to the conclusion that we have argued all along: the treasurer cannot be sued for making complex investment decisions or for failing to predict Lehman's collapse."

"This lawsuit was a bad idea from the start," Mr. Gasner told the Almanac. He said he had tried to convince the plaintiffs that a lawsuit would be a waste of time and money, and that it would merely be "seeking to move money from one pocket to another."

Ms. Campbell could not be reached for comment by press time. It is unknown whether the plaintiffs will seek a review of the appeals court decision by the state Supreme Court.

After filing the claim two years ago, Superintendent Campbell told the Almanac that her office, school district representatives and the county had been working together for nearly two years to find ways to recover the money, but that the talks didn't yield satisfactory results. She said the districts not only wanted their money back, but wanted "to be sure that the policies of the county investment pool have been changed to make sure this doesn't happen again."

In November 2011, a San Francisco Superior Court judge dismissed the lawsuit, ruling that the county and its treasurer were immune from civil suits. The appeals court was asked to review the decision.